RegTech Intelligence 
UK crypto-asset regulation should require firms to be authorised locally and establish a physical presence to help asset recovery efforts when customer funds are lost to fraud or theft, lawyers said.
HM Treasury’s crypto-asset regulation consultation paper, published this month, says crypto-asset activity provided in or to the UK must be authorised by UK authorities. Treasury officials, however, are considering “equivalence-type arrangements” whereby firms could provide services in the UK without a physical presence. That could hinder asset recovery if firms authorised here but not physically present are not subject to asset-freezing orders or requirements to cooperate with information requests, for example.
“Asset recovery needs to be front and centre of the new regulations. Regulators can only regulate what’s under their remit and control. If there’s no jurisdictional element, there’s always going to be frustrations about enforcement. It’s left to investigative agencies to trace assets abroad, or other jurisdictions to deal with it. In the absence of a presence in the UK, there is always going to be frustration about enforcement,” said Neil Williams, deputy head of complex crime at Reeds Solicitors in London.
Lawyers helping clients to trace and recover crypto-assets lost to fraud or theft told Regulatory Intelligence that getting exchanges based offshore — or nowhere — to cooperate has been difficult, in part because they do not accept being subject to UK law.
Exchanges can take uncompromising positions, refusing to accept service of legal documents or to comply with information requests or anything that might indicate they have submitted to jurisdiction. Exchanges pursue deep-pocket intimidation by instructing expensive lawyers then hitting victims with a big bill for costs to discourage other recovery attempts. That is not the way it should work. Victims should have recourse, said Matt Green, a senior associate at Shoosmiths in London.
Once exchanges obtain release from any liability, they may be more willing to cooperate. Still, requiring crypto-asset firms operating in the UK to have a UK presence will help asset recovery.
“It would be helpful, because the arguments relating to jurisdiction, and the basis on which [exchanges] can challenge every move
— [such as] we don’t accept service via email, we are a member of the Hague Convention and therefore service should be done in a different way — a lot of those unnecessary procedural obstacles would be removed,” Green said.
Legal routes to recovery
The UK should be a place where victims can be helped by the judiciary and the legal system. The police are limited in their ability to pursue crypto fraud or theft and rarely pursue cases. That means victims without the means to fund lawyers and specialist crypto-asset investigators are unlikely to recover assets.
“As a jurisdiction, we are attractive [for crypto-asset recovery]. There are American law firms that have contacted us saying ‘you have powers, rights and remedies available to you via the courts that we simply don’t have’. Therefore, there is an opportunity for them to potentially broaden some of their litigation to include the UK for us to potentially get the springboard applications that they are looking for,” said Andrew Bowden-Brown, a banking and finance partner at Shoosmiths in London.
On paper, the UK should be a great place to try to recover crypto-assets, lawyers said. There is now a decent body of case law to answer some of the fundamental questions about ownership and what assets might be covered by a freezing injunction. UK judges can be inconsistent in their understanding of crypto-assets and why, for example, they would grant a freezing injunction on a crypto-asset exchange.
Some UK judges are getting up-to-speed on the detail of crypto recovery cases. That is making it easier to make court applications — if a lawyer happens to be in front of that judge familiar with crypto cases, lawyers said.
Economic Crime and Corporate Transparency Bill proposals
The Economic Crime and Corporate Transparency Bill proposes to create a crypto-asset-specific civil forfeiture power to offset the risk posed by those that cannot be prosecuted but use their funds to further criminality or for terrorist purposes. It will include amendments to the Proceeds of Crime Act 2002 ( PoCA) to support the recovery of crypto-assets.
“This is a nice, neat regime for confiscating crypto-assets. We had been looking for ways to shoehorn crypto-assets into the Proceeds of Crime Act and none of them quite worked. This will be something that is, on paper at least, easier,” said John Binns, a partner at BCL Solicitors in London, who specialises in proceeds of crime laws.
There will be some criminal businesses that slip through the Financial Conduct Authority’s (FCA) net and become regulated. These could be Ponzi schemes such as OneCoin or other scams and bad actors. The FCA too should be thinking about asset recovery and how their powers may be used with crypto-assets, he said.
“There is such a variety of crypto businesses and some of them are really risky. The FCA’s powers to freeze accounts on a civil basis or to forfeit funds that they say are breaching FSMA [the Financial Services and Markets Act 2000], assuming that will extend to crypto- assets once they are properly regulated, could turn out to be far more important than substantive penalties or even proceeds of a crime, because that would give them a route to be able to freeze or seize relatively easily the proceeds of “scams” that may be unproven for the time being. That’s, in practical terms, probably the most useful tool they have to tackle miscreants,” Binns said.
Cross-border problem
Jurisdiction and asset recovery is a problem worldwide. The Dutch Central Bank (DNB) fined Binance 3.3 million euros last year for operating in the Netherlands without authorisation. Dutch lawyers are trying to recover assets from a boiler room operating on Binance, without much success.
Germany’s BaFin is investigating broker-shield.de and other crypto fraudsters based in the UK and targeting German consumers. broker-shield.de’s parent company, Cbrokers Technology Ltd, is registered on the UK corporate register, Companies House. The site has since been taken down but it was not on the FCA warning list. BaFin and the FCA have said they are continuing to cooperate post- Brexit, but declined to comment on broker-shield.de.
This article was published by Thomson Reuters Accelus Regulatory Intelligence on 23 February, 2023
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